Warning raised over lower LandBank, DBP loss buffers

VIABILITY ratings for two state-owned banks could be lowered given their contributions to the Maharlika Investment Fund (MIF), a debt watcher said.

“The capital contributions made by Land Bank of the Philippines (LandBank) and Development Bank of the Philippines (DBP) towards the country’s inaugural sovereign wealth fund, Maharlika Investment Corporation (MIC), are unlikely to affect the banks’ issuer default ratings, which are driven by sovereign support,” Fitch Ratings said in a commentary released on Wednesday.

“However, the banks’ viability ratings, which indicate their standalone credit profiles, might be lowered absent concrete plans to replenish their diminished loss absorption buffers,” it added.

LandBank and DBP have respectively contributed P50 billion and P25 billion to MIC’s authorized capital of P500 billion.

Both banks subsequently have been given seats — occupied by

LandBank President and CEO Ma. Lynette Ortiz and DBP President and CEO Michael de Jesus — on the nine-member MIC board.

The investments, Fitch noted, would have substantially reduced the banks’ regulatory capital ratios if not for regulatory relief.

Without such, DBP’s common equity Tier 1 ratio would have dropped to approximately 8.7 percent from 13.2 percent and that for LandBank to 10.9 percent from 14.5 percent.

“This underpins our negative outlook on the banks’ capitalization scores, which we may revise down if the banks likely cannot adequately replenish their capital buffers in the near to medium term,” Fitch said.

“Regulatory relief that exempts the banks from deducting capital is insufficient to support the capitalization scores, as it does not improve the banks’ underlying capitalization,” it added.

The two banks have requested a temporary exemption from Bangko Sentral ng Pilipinas’ capital requirements following their contribution to the MIF. This is due to the possibility of not fulfilling capital adequacy ratio requirements.

A planned exemption of dividend payments to the government could help rebuild capital to ameliorate the deficit, Fitch said.

It said that a lower capitalization score could limit headroom

in LandBank’s viability rating of “BB” and might lead to a downgrade of DBP’s viability rating due to a narrower loss-absorption buffer, inferior asset quality, and lower profitability compared to local-rated peers.

A viability rating downgrade, however, won’t have an impact on the banks’ issuer default ratings, which Fitch said are tied to the anticipation of sovereign support rather than LandBank and DBP’s independent credit standings.

“We believe the banks’ MIC investment reinforces the government’s propensity to support the banks, as it further entrenches their policy roles, making them more strategically important to the state,” Fitch added.

LandBank and DBP officials were not immediately available for comment.